| 20.11.2023

Board composition plays a pivotal role in shaping transparency, corporate social performance, and overall firm success

New research reveals that specific elements of board composition can influence financial reporting quality, social and environmental performance, and the overall success of a firm.

In his doctoral thesis titled "Essays on the Impact of Board Composition on Financial Reporting Quality, Corporate Social Responsibility, and Tournament Incentives," Aaron Afzali explores how the composition of a board of directors can affect different outcomes for a firm.

While diversity within the board can bring many benefits, it is important to note that having a higher proportion of foreign directors on the audit committee can harm the reporting quality of the firm, especially when these foreign directors do not speak the same language as that spoken in the firm's home country. However, this negative impact can be mitigated by stronger country-level investor protection mechanisms and the financial expertise of these foreign directors.

Further, firms that appoint too many new directors after their CEOs take charge (co-opted directors) experience significantly lower corporate social responsibility (CSR) performance.

“An excess of co-opted directors, who are often perceived as serving the CEO's interests, has a detrimental effect on a firm's CSR activities and environmental performance, particularly in areas like carbon emissions, toxic emissions, waste management, energy efficiency, and carbon footprint”, Afzali claims.

This impact is more pronounced for firms that offer higher short-term incentives to their CEOs, such as high salaries and bonuses. The impact is also notable for firms operating in industries highly reliant on external funding or characterized by informational asymmetries.

Directors concerned about their reputation in the job market are more likely to pay CEOs extra to boost profitability and safeguard their reputation in the labor market.
“These directors provide significantly larger compensation packages to CEOs compared to vice presidents, fostering competition among vice presidents for the CEO position.
This drives vice presidents to work diligently and pursue potentially riskier investment strategies, resulting in enhanced firm performance and the preservation of directors' reputations,” Afzali points out.

You can read the whole thesis here:
Essays on the Impact of Board Composition on Financial Reporting Quality, Corporate Social Responsibility, and Tournament Incentives Opens in new window

Aaron Afzali will defend his thesis on 24 November, at 12.00 in Hanken School of Economics, Arkadiankatu 22, Helsinki.
Opponent: Professor Gilad Livne, University of Bristol, United Kingdom
Custos: Professor Kim Ittonen, Hanken School of Economics, Finland

The doctoral defence will be held as hybrid. Participants can attend on site or via videoconference.
Access the video conference via this link.